WRONG EXPECTATIONS ARE INFLUENCING MNT APPRECIATION

WRONG EXPECTATIONS ARE INFLUENCING MNT APPRECIATION

According to Bank of Mongolia on April 9, 2012
Bank of Mongolia

Mongolian daily “Udriin Sonin” in relation to MNT starting to appreciate again after
depreciating in the beginning of the year:

Why recently MNT is appreciating?
 Official exchange rate has appreciated YTD 6.5% and 1.2% in last 5 days. Taking into
consideration macroeconomic fundamentals, Mongolia still has external trade deficit and rate of
growth of imports is still 2 times higher than that of exports, total external trade deficit YTD is
409.4 million USD. FX inflow is less than outflow and therefore net FX flow is negative and
imports consumption is growing. Those factors in short term are influencing MNT to depreciate.
 Yet because of supply and demand on FX market and exchange rate expectations there is an
occurrence of MNT appreciation. There are several factors to explain this.
 First of all, in connection with start of spring season, there is expectation that MNT will
appreciate because of cashmere and wool revenues. Public has this expectation even though
cashmere exports revenues occupy very little share of external trade due to increase of mining
exports.
 Secondly, successful sale of DBM’s 580 million USD bonds and MMC’s 600 million USD
bonds on international markets have influenced for rise of expectations of MNT appreciation
among public. However, because Bank of Mongolia will increase foreign exchange reserves in
the amount of sold bonds there will be no exchange rate excessive volatility and proceeds from
these bonds will be spent on projects such building rail and automobile roads, Power Plant No 5
and Sainshand Industrial Hub. Therefore, majority of the proceeds will be spent on the
equipment and raw materials for those projects and by a way of payment for imports will go
back abroad.
 Last influence comes from discussion by certain banks on bonds issuance and this is
influencing market expectation. However, Bank of Mongolia instituted requirements for banks to
ensure prudential FX ratios. In another words, FX position of the banks cannot go above 40% of
a banks’ own equity and this ensures that foreign exchange coming in from bonds issuance will
be kept from conversion.
What position does Bank of Mongolia has on MNT appreciation?
At any given time, Bank of Mongolia adheres to position that foreign exchange rate will
determined flexibly based on macroeconomic fundamental indicators and market supply and
demand. During FX rate excessive volatility , Bank of Mongolia participates in FX market by
intervention. For example, in this week’s first auction Bank of Mongolia participated
and satisfied 94.7% of proposal of banks to sell USD and by second auction satisfied it 100%.
Therefore, because of abovementioned reasons and wrong expectations, tendency for MNT to
appreciate has been observed. Bank of Mongolia will continue do when necessary related
regulation in connection with macroeconomic fundamental indicators and exchange rate
fluctuation.